Gordon gives at a low inflation rate, and takes away with the higher one

Pay rises in the public sector are outstripped by the interest on student loans - currently at 4.8 per cent - creating a financial gap that means it is increasingly difficult for new employees of Brown's government to make ends meet, writes Jon Robins

Recent graduates working in the public sector are coming under increasing financial pressure as the rate of interest charged on their student loans looks likely to outstrip their salary increases.

The government is offering many public sector employees, including teachers and civil servants, an increase of 2.45 per cent or less this year, but as student loans are charged at around the equivalent of the retail prices index (RPI) on 31 March every year, graduates are paying 4.8 per cent until September, the RPI on 31 March last year. From September they are likely to pay 3.8 per cent, still outstripping the increase in their salaries.

The gap is making life very difficult for recent graduates who still have big student loans. 'I love what I do but teaching is an incredibly stressful job,' says Rob Illingworth, a 29-year-old who teaches modern languages at Eastwood comprehensive outside Nottingham. 'This is made worse by a government that gives at the CPI [the consumer prices index, the government's preferred inflation measure, which excludes mortgage rates], and takes away at the RPI. That disparity is unforgivable.'

Illingworth, who sits on the National Young Teachers Advisory Committee representing Yorkshire and the midlands, reckons that the meagre pay rise for a newly qualified teacher is more than wiped out by the interest on the average student loan of £16,000. 'Most young teachers that I work with have thought about leaving the profession - and I've been there too,' he says. 'I reckon that, until very recently, after I have paid my mortgage, car tax, loan, petrol, utility bills and council tax I had £150 a month to spend,' he says. 'On occasion I've had to ask friends for lifts into school because I could not afford to pay for petrol towards the end of the month.'

The cost of student loans effectively doubled from last September, jumping from 2.4 per cent to 4.8 per cent. Although this does not have an impact on monthly repayments (students have to pay 9 per cent of earnings above £15,000) it increases the total amount of their loan and how long it takes to pay it off. 'Graduates are already struggling to pay off thousands of pounds of debt, and these huge increases in repayment rates are making things even worse,' says National Union of Students president Gemma Tumelty. 'The situation is particularly bad for public sector workers, whose pay increases are worked out at a lower rate, and for women, who are still earning less than men.'

Graduates often find themselves 'running to stand still' when it comes to paying off their debts, reckons Andrew Cheseldine, of Hewitt's UK Retirement Consulting. 'Even after 10 years' work, graduates with a typical loan of £21,000 making the compulsory 9 per cent repayment will still be left with £19,000, based on typical earning potential starting at £21,000 for graduates, and assuming the same student loan interest rates and salary inflation as this year. They'll have only chipped away £2,000 in 10 years. A poor pay round and the rising cost of student loans is going to make life harder,' he says.

Young doctors are facing a particularly grim year with a 2.2 per cent salary increase and the right to free accommodation being removed for those who start in August. 'We feel like we have been hit extra hard this year,' says Ian Noble, chair of the BMA's Medical Students Committee, who reckons that the loss of accommodation provided by hospitals for doctors in their first year on the wards is the equivalent of a pay cut of approximately 20 per cent, about £4,800 a year. The BMA argues that this comes at a time when student debt is at its highest level (£20,000 for medical students) and junior doctors' salaries are 'shrinking'.

Matt Forbes has just finished his finals at Sheffield University and starts work at a central London hospital in July. The 24-year-old medic predicts that his debt by then will be £35,000, comprising a student loan of £20,000, a £10,000 bank loan and a £5,000 overdraft. His starting salary is £23,000. Forbes reckons that he will have to pay about £600 a month for rent in London which he describes as a 'more pressing concern' than student loan repayments. He says: 'Student loan debt was the cheapest form of borrowing and people almost forgot about it, but now the interest rates have gone up to 4.8 per cent, that's going to really bite as well.'

Does £35,000 feel like a large amount of money to owe at the start of a career? 'When you commit to being a student you become very accepting of the idea of debt,' he replies. 'I have been sensible at university and my debt certainly wasn't accumulated by partying. It is a result of practical living.'

Hope for key workers

Key workers are being offered the chance to buy a property at half price under a scheme being launched by Notting Hill Home Ownership (NHHO), one of the UK's largest housing associations.

The Key Workers Initiative (KWI) will enable buyers such as nurses, teachers, police officers and social workers to buy a new apartment at a discount of 35 to 50 per cent of its overall value. But unlike traditional shared-ownership schemes, buyers will not have to pay any extra monthly rent to the housing association on the part of the property they don't own - the only extra fee they will face will be a monthly service charge of about £150.

The KWI will initially only be available at Parkside, a new development in Wandsworth, south London, where there will be 50 one- and two-bedroom discounted apartments on sale from 28 June. The apartments will be available to key workers from anywhere across London, unlike usual shared-ownership offers, which only accept potential buyers who already work or live in the area.

A typical one-bedroom apartment at Parkside costs £280,000 at full price; under the KWI, it could cost £140,000. Buyers will have to raise a mortgage on the part they are buying and have the option of 'staircasing' (buying a bigger share) if or when they can afford it.

Mark Vaughan of NHHO says: 'This scheme offers an amazing opportunity for key workers and we're expecting it to be very popular.'

NHHO says it is able to offer the no-rent deal because it is using land provided by English Partnerships, the government's national regeneration agency. 'Because there's no land price, we can pass the low cost on to buyers,' explains Vaughan. 'If we can continue to secure cheap land, we could ideally offer the no-rent deal on a normal basis, but for the time being the discounts will only be offered to key workers.'

Key workers across London earning less than £60,000 a year can qualify for the scheme. Go to nottinghillhousing.org.ukHuma Qureshi